Flaugher v. Cone Automatic Mach. Co.

• Decision Date: 22 April 1987
• Docket Number: No. 86-929,86-929
• Citation: 507 N.E.2d 331,30 Ohio St.3d 60,30 OBR 165
• Parties: , 55 USLW 2623, 30 O.B.R. 165, Prod.Liab.Rep. (CCH) P 11,390 FLAUGHER et al., Appellants, v. CONE AUTOMATIC MACHINE CO. et al., Appellees.
• Court: Ohio Supreme Court

Page 60

30 Ohio St.3d 60

507 N.E.2d 331, 55 USLW 2623, 30 O.B.R. 165,

Prod.Liab.Rep. (CCH) P 11,390

FLAUGHER et al., Appellants, v. CONE AUTOMATIC MACHINE CO. et al., Appellees.

No. 86-929.

Supreme Court of Ohio.

April 22, 1987.

Syllabus by the Court

1. A corporation which purchases the assets of a manufacturer is not liable for injury resulting from a defective machine produced by that manufacturer unless there is an express or implied assumption of such liability, or the transaction constituting the sale of assets amounts to a de facto merger or consolidation, or the purchaser corporation is a mere continuation of the seller corporation, or the transaction is a fraudulent attempt to escape liability.

2. A successor corporation has no duty to warn of defects in products manufactured by its predecessor unless the successor is shown to have had pre-existing knowledge, actual or constructive, of the particular defect alleged to exist. Even where such knowledge is lacking, however, the successor may still be liable for injuries resulting from its predecessor's defective products if any of the four exceptions to successor non-liability applies.

On April 24, 1979, appellant Carla Flaugher was injured on the job by an eight-spindle Conomatic screw machine. This machine had been manufactured in 1953 by Cone Automatic Machine Company, Inc. ("Cone I"), a Vermont corporation which no longer exists. Substantially all of Cone I's stock was acquired by Pneumo Corporation ¹ on July 19, 1963, and the remaining assets were transferred shortly thereafter. Cone I ceased to conduct business on August 31, 1963 and was dissolved on September 5, 1963. On the following day, Pneumo Corporation formed Cone Automatic Machine Co., Inc. ("Cone II") for the sole purpose of holding the Cone name. Cone II, an appellee herein, is and always has been an inactive corporation with no employees, physical assets or place of business.

From August 31, 1963 until December 15, 1972, Pneumo Corporation operated the Pneumo Dynamics Machine Tool Group ("PDMTG"), which included the assets of the dissolved Cone I, as well as the assets of the former Blanchard Machine Company and the former Springfield Machine Company. PDMTG continued to manufacture the Conomatic line of machines. By an agreement effective December 15, 1972, appellee Cone-Blanchard Machine Company ("Cone-Blanchard") purchased the assets of PDMTG and the stock of Cone II from Pneumo Corporation for approximately $11 million. Pneumo Corporation continued as an active, viable operation. As a result of the purchase, Cone-Blanchard took over the manufacture of Conomatic machines.

Appellant and her husband, Bradley Flaugher, instituted this action on April 20, 1982, naming as defendants Cone I, Cone II, Pneumo Corporation, and Cone-Blanchard Machine Company. Appellant alleged, inter alia, that her injuries were sustained as a direct and proximate result of the defendants' negligent design and manufacture of the machine in question, and their negligent failure to warn of its dangerous condition.

The trial court sustained Cone I's motion to dismiss for failure to state a claim upon which relief can be granted on the basis that applicable Vermont law bars claims against dissolved corporations where the claim did not exist prior to dissolution. The court also granted Pneumo Corporation's motion for summary judgment, ruling that appellants' complaint was time-barred. These rulings were not contested by appellants. The court granted the motions of Cone II and Cone-Blanchard for summary judgment, holding that neither corporation fell within the traditional exceptions to the general rule of successor non-liability. The court refused to apply the so-called "product line" theory of liability created by the California Supreme Court in Ray v. Alad Corp. (1977), 19 Cal.3d 22, 136 Cal.Rptr. 574, 560 P.2d 3. The court reasoned that even if this theory were adopted in Ohio, it would be inapplicable under these facts since the predecessor entity, Pneumo Corporation, remains a viable business concern. Nor could liability attach to appellees by virtue of any failure in their alleged duty to warn appellant of the defect in the machine which injured her, as appellees had no notice of the purported defect.

On appeal, the court of appeals affirmed, adopting substantially the same reasoning as advanced by the trial court.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Lindhorst & Dreidame Co., L.P.A., and Jay R. Langenbahn, Cincinnati, for appellants.

McCaslin, Imbus & McCaslin and R. Gary Winters, Cincinnati, for appellees.

DOUGLAS, Justice.

The instant appeal presents this court with three separate questions. The first is whether either of the appellee corporations falls within a recognized exception to the traditional rule of successor non-liability. Secondly, we are urged to adopt the "product line" theory of liability as espoused in Ray v. Alad Corp., supra. The final question is whether appellees had a duty to warn appellant of the alleged defect in the machine which injured her. Our analysis follows.

I

The general rule in products liability is that a successor corporation's amenability to suit will depend on the nature of the transaction which gave rise to the change in ownership. 1 Frumer & Friedman, Products Liability (1983) 70.58(3), Section 5.06. Where the transfer is accomplished by means of a statutory merger or consolidation, the liability of the former corporation will be assumed by the new entity. Id. Where there is merely a sale of a corporation's assets, the buyer corporation is not liable for the seller corporation's tortious conduct unless one of the following four exceptions applies:

(1) the buyer expressly or impliedly agrees to assume such liability;

(2) the transaction amounts to a de facto consolidation or merger;

(3) the buyer corporation is merely a continuation of the seller corporation; or

(4) the transaction is entered into fraudulently for the purpose of escaping liability. Id. at 70.58(4); Burr v. South Bend Lathe, Inc. (1984), 18 Ohio App.3d 19, 18 OBR 43, 480 N.E.2d 105; Annotation, Products Liability: Liability of Successor Corporation for Injury or Damage Caused by Product Issued by Predecessor (1975), 66 A.L.R.3d 824.

The transfer under scrutiny here, i.e., the purchase of PDMTG (which included the assets of Cone I, the actual manufacturer of the machine in question) and Cone II by appellee Cone-Blanchard, was a "sale of assets" transaction. Thus, Cone-Blanchard is not liable unless one of the above four exceptions applies.

Appellants concede that the second and fourth exceptions above are inapplicable. They contend, however, that the first and third exceptions exist under these facts.

Appellants' argument regarding the first exception is that the purchase agreement between Pneumo Corporation, Cone I's sole successor, and Cone-Blanchard is ambiguous as to whether Cone-Blanchard intended to assume tort liability for products manufactured by Cone I, and that such ambiguity should be construed in appellants' favor. However, our examination of the pertinent portions of the purchase agreement reveals that no ambiguity exists. Cone-Blanchard did not contract to assume liability for the alleged tortious conduct of Cone I.

Section 6.2 of the agreement ² provides that Cone-Blanchard shall assume any liability incurred by Pneumo Corporation arising from any breach of warranty made by Pneumo, or from any negligence or willful misconduct of Pneumo, to the extent covered by Cone-Blanchard's insurance. This section clearly and unambiguously limits Cone-Blanchard's assumption of liability to any liability stemming from Pneumo's own acts or omissions. The alleged defect in the machine in question is chargeable only to Cone I, its actual manufacturer.

Section 5.2 ³ provides that Pneumo shall indemnify Cone-Blanchard for all claims against PDMTG asserted after the effective date of the agreement "arising out of any transaction entered into, or any state of facts existing" prior thereto, where liability for such claims has not already been assumed by Cone-Blanchard elsewhere in the contract. This section unambiguously relieves Cone-Blanchard of any liabilities predating the purchase agreement which are not expressly assumed by Cone-Blanchard.

Section 5.1 specifically limits the liabilities assumed by Cone-Blanchard to those expressly enumerated in that section, ⁴ none of which applies to the instant cause.

It is evident from the foregoing that Cone-Blanchard did not expressly or impliedly assume any liability for injury caused by defective machines manufactured by Pneumo's predecessor, Cone I. Thus, the "assumption of liability" exception has no bearing here.

Nor does the "mere continuation" exception find application under these facts. In no way can the buyer, Cone-Blanchard, be characterized as a mere continuation of the seller, Pneumo Corporation, or of the seller's predecessor, Cone I.

"The gravamen of the traditional 'mere continuation' exception is the continuation of the corporate entity rather than continuation of the business operation." (Emphasis sic.) 1 Frumer & Friedman, supra, at 70.58(12), Section 5.06[c]. The exception has been narrowly construed to protect corporations from unassumed liabilities. Id. at 70.58(13), Section 5.06. Those courts which have expanded this exception have done so on the basis of significant shared features between the buyer and the seller, such as the same employees, a common name, or the same management. See, e.g., Cyr v. B. Offen & Co. (C.A.1, 1974), 501 F.2d 1145, 1153-1154 (same employees continued after transfer of ownership to produce same product, in same plant, with same supervision); Turner v Bituminous Cas. Co. (1976), 397 Mich. 406, 244 N.W.2d 873 (retention of key personnel and trade name). The reasoning behind this expanded view of continuity is that where...